Liquid Alternative Investments MAPS. Market Analysis & Performance Summary

Transcription

1 Liquid Alternative Investments MAPS Market Analysis & Performance Summary Q 1

2 Q 1 LAI MAPS Overview: Surviving the Brexit What are Liquid Alternatives? In our view, liquid alternative investments ( LAI ) are daily liquid investment strategies that, like hedge funds, seek to deliver: differentiated returns from those of core asset classes returns that are most beneficial during difficult times in core markets; the potential to reduce overall portfolio risk; and the potential to mitigate the effects of severe drawdowns, particularly in equities. We note that neither alternative mutual funds nor hedge funds are riskless investments, so investors can lose money in both types of funds. This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. To learn more please visit our Liquid Alternatives Center at GSAMFUNDS.com/LAC How to Use the LAI MAPS The MAPS is designed to help investors better understand and allocate to liquid alternatives, or alternative mutual funds. In this analysis, we narrow down the vast universe of liquid alternatives to the funds that may better provide the differentiated return and risk characteristics of hedge funds. We then categorize those funds into LAI Peer Groups, which align with the five major hedge fund categories: equity long/short, event driven, relative value, tactical trading/macro, and multistrategy. 1 Investors can use these LAI Peer Groups to evaluate alternative mutual funds relative to other LAI and similar hedge fund strategies. The Dashboard on page provides an overview of Q 1 LAI Peer Group performance. An explanation of our approach follows on page. Long-term performance analysis begins on page 1. Glossary Terms Refer to the glossary on page for additional information on any term in italics. Just as markets returned to a calmer state after a volatile first quarter, they suffered another shock: on June, 1, the citizens of the United Kingdom voted to leave the European Union. Global stock markets roiled, the British pound plunged, and gold and Treasuries spiked. 1 Many investors with traditional portfolios were negatively impacted. Liquid Alternative Investment (LAI) strategies performed relatively well, helping to manage portfolio drawdowns during the period. Between June and June 7, a traditional % equity/% fixed income index portfolio was down.7%, while the LAI Multistrategy Peer Group, which represents diversified baskets of liquid alternative strategies, fell.8%. Furthermore, certain strategies within the LAI Peer Groups were able to profit during the Brexit turmoil. For example, within the LAI Tactical Trading/Macro Peer Group, managed futures strategies capitalized on the rising price of gold, the falling British pound, and declining interest rates. This LAI Peer Group ended the quarter up.%, and is the best performing Peer Group year-to-date (up 1.7%). Because US stock and bond markets quickly recovered from the Brexit shock, many traditional portfolios ended the second quarter in positive territory. Three of the five LAI Peer Groups (Event Driven, Tactical Trading/Macro and Multistrategy) also experienced gains, while two (Equity Long/Short and Relative Value) were down for the quarter. Year-to-date, three LAI Peer Groups (Tactical Trading, Event Driven, and Relative Value) have posted positive results, while the LAI Equity Long/Short Peer Group was the worst performer. Relative to their hedge fund peers, two LAI Peer Groups (Equity Long/Short and Tactical Trading/Macro) outperformed in the second quarter, while three fell short. Four of the five LAI Peer Groups (all except Event Driven) outperformed the relevant HFRX indices over the first half of the year. Although the initial impact of the Brexit was short-lived in the US, a deep uncertainty in the markets remains investors have withdrawn assets from US equity mutual funds every month this year. We continue to believe liquid alternative investments can reduce the impact of market shocks, and help investors maintain their portfolio allocations over the long term. KEY TAKEAWAYS Four of the five LAI Peer Groups outperformed traditional / portfolios during the Brexit crisis. In Q 1, three of the five LAI Peer Groups generated positive results, including the LAI Multi-Strategy Peer Group. Relative to their hedge fund peers, the LAI Peer Groups posted mixed secondquarter and year-to-date results. 1-. Please refer to end notes on page for important disclosures and additional information. Diversification does not protect an investor from market risk and does not ensure a profit. 1

3 LAI Performance Dashboard - Q 1 LAI Equity Long/Short Funds that select stocks long, using a bottom-up, top-down, fundamental or quantitative process, and then hedge with short stocks, stock index futures, ETFs, or long put options. MARKET ENVIRONMENT The first two months of the quarter were relatively calm for equities, as evidenced by a low CBOE Volatility Index reading and the steady upward climb of the S&P. Volatility rose in June, in anticipation of a US interest rate hike, and then spiked on June, following the UK referendum vote. 7 Most equity long/short strategies were down in June and experienced mixed results for the second quarter. BETTER PERFORMERS Funds with larger net long allocations to healthcare or energy stocks 8 Funds with a momentum or small-cap style orientation LAI Event Driven Funds that invest in equity or debt securities in order to potentially profit from corporate events, such as mergers and bankruptcies. These strategies include merger arbitrage and long/short credit. BETTER PERFORMERS High yield credit-oriented strategies LAI Relative Value Funds that seek to capture the price differential between two similar securities. These strategies include equity market neutral, convertible arbitrage, and option arbitrage strategies. BETTER PERFORMERS Convertible arbitrage strategies Option arbitrage or volatility strategies WORSE PERFORMERS Quantitative long/short strategies, primarily due to short stock selection Funds with larger net long allocations to European equities MARKET ENVIRONMENT Long/short credit-oriented strategies within this Peer Group fared well, as high yield corporate bonds, particularly in the energy and metals and mining sectors, and high yield municipal bonds profited. 9 Merger strategies generally posted gains, but some experienced losses following a few large deal breaks. 1 WORSE PERFORMERS Merger funds with larger positions in broken merger deals MARKET ENVIRONMENT Option relative value strategies profited from short volatility positions early in the quarter, and then from long positions when volatility rose in June. Convertible arbitrage strategies benefitted from credit spread tightening throughout the quarter. 11 Equity market neutral strategy results were mixed, with global equity market neutral strategies struggling over the quarter. WORSE PERFORMERS Global equity market neutral strategies LAI Equity Long/ Short Peer Group 8 7.% HFRX Equity Hedge LAI Event Driven Peer Group Return.% HFRX Event Driven LAI Relative Value Peer Group % HFRX Relative Value Arbitrage LAI Tactical Trading/Macro Funds that take dynamic directional (long or short) views across asset classes (equity, debt, commodities, and currencies) using systematic or discretionary approaches. MARKET ENVIRONMENT Managed futures strategies generally performed well during the Brexit crisis, some with high single or double-digit gains between June and June 7. Managed futures funds capitalized on rising precious metal prices, falling Treasury rates, and a falling British Pound, trends which had started long before the second quarter of 1. 1 Some global macro funds, particularly those with larger equity positions, suffered losses over the period. BETTER PERFORMERS Longer-term, price trend-following funds Currency focused strategies LAI Multistrategy Funds that employ strategies consistent with at least two of the other LAI Peer Groups through a multi-manager or singlemanager approach, using active management or passive replication. BETTER PERFORMERS Funds with larger allocations to managed futures strategies Funds with larger allocations to credit and commodities (energy and precious metals) 1 WORSE PERFORMERS Global macro strategies Funds with long exposure to European equity markets and short Treasury positions 1 MARKET ENVIRONMENT The majority of funds in this Peer Group experienced positive returns in the second quarter, and participated in a relatively small part of the quarter-end drawdown. In general, managed futures and long/short credit allocations helped multistrategy funds performance, and equity long/short allocations detracted from returns. Quantitative multistrategy funds generally underperformed multi-manager funds. WORSE PERFORMERS Quantitative multistrategy funds Funds with larger allocations to equity long/short strategies LAI Tactical Trading/Macro Peer Group 1 9.% HFRX Macro/CTA LAI Multistrategy Peer Group 7.% HFRX Global Hedge Glossary Terms: Please refer to the glossary on page for additional information on any term in italics. The returns represent past performance. Past performance does not guarantee future results, which may vary. Current performance may be lower or higher than the performance quoted. The performance results are based on historical performance of the indices used. The results are net of fees and will vary based on market conditions and your allocation. Returns for other share classes will vary due to different fees charged. As of June, 1. HFR data as of August 1, 1 update. -1. Please refer to end notes on page for important disclosures and additional information.

4 Why We Created the LAI MAPS We believe our analysis provides new insights into the following three common questions: What types of liquid alternative strategies should I consider? Are my liquid alternative investments meeting appropriate performance expectations? How has the performance of liquid alternatives compared to private placement hedge funds? As liquid alternative investments have risen in popularity, many investors considering these strategies have told us that they find themselves without a consistent evaluation framework. How, for instance, can thoughtful manager selection or performance evaluations proceed if even fund categories are open to debate? To a surprising degree, we believe the diverse LAI field lacks the most basic tools of assessment. We believe a thoughtful evaluation framework can lead to a number of potential benefits and help mitigate certain risks, such as unrealistic return expectations or unwarranted concentration in a particular manager or strategy. We hope that our analysis can provide additional context, helping to fill what we view as a significant analytical vacuum. Because LAI are structured as mutual funds, many investors have defaulted to widely respected data providers such as Morningstar, Inc. and Lipper to categorize and evaluate LAI alongside traditional long-only mutual funds. Our discussions with clients and financial advisors have revealed that many investors are overwhelmed by these LAI categorization schemas, which as of June, 1, incorporated as many as 1 funds across 17 unique subcategories. 1 We believe investors may be better served by looking at the universe of LAI through the framework which we call a hedge fund lens. Hedge fund investors have historically categorized the universe of thousands of hedge funds using only five categories for selection and evaluation Equity long/short. Event driven. Relative value. Tactical trading/macro. Multistrategy See Figure a on page 1 for a more comprehensive description of each investment style. The LAI Benchmarking Problem It is easy for investors to follow the stock and bond markets. For example, by simply turning on the news, investors can determine the performance of the S&P, and, in turn, compare the index to the performance of an equity fund. However, evaluating the performance of LAI funds is more challenging, as they do not track a single commonly accepted benchmark. We believe that comparing alternative mutual funds to their hedge fund counterparts is a helpful exercise. The goal of liquid alternative investments and hedge funds is often the same: (1) the potential for differentiated returns versus widely owned asset classes such as core equity and fixed income, () the potential to reduce overall portfolio risk, and () the potential to mitigate the effects of severe drawdowns, particularly in equities. Also, like hedge funds, these mutual funds attempt to reshape the risk of their underlying investments using techniques such as shorting, derivatives, and leverage. We also believe that a hedge fund lens can provide investors with useful context as they consider how to benchmark the performance of these funds appropriately. Few liquid alternative funds have more than a five-year track record. 17 Thus, they have generally experienced only one prevailing market environment a bull equity market coinciding with a period of steadily declining interest rates. For this reason, we believe it can be difficult to know what to expect from these funds as market conditions change over the longer term. Hedge fund investors may find it somewhat easier to set appropriate long-term expectations for their investments. Well-known hedge fund index providers offer more than two decades of performance data across various hedge fund strategies and through many different types of market environments. In summary, we believe a categorization framework which mirrors what has been adopted by the hedge fund industry may help investors construct more diversified 18 portfolios and set more realistic risk and return expectations for their LAI allocations. By paring down the LAI universe into hedge fund-like peer groups, we believe that the returns of LAI mutual fund peer groups and the hedge fund indices could be more comparable. Of course, we can only look at the past, and past performance is not indicative of future performance, an observation which we believe must be part of any well-grounded LAI analysis. Additionally, there are biases presented in hedge fund data that may not be present in mutual fund data, such as selection and backfill biases. Survivorship bias exists in both data sets. Glossary Terms: Please refer to the glossary on page for additional information on any term in italics. 1. This includes the 1 categories in Morningstar s alternative broad category group as well as the Nontraditional Bond category, which contains nontraditional and alternative funds. In an effort to distinguish funds by what they own, as well as by their prospectus objectives and styles, Morningstar developed the Morningstar Categories. While the prospectus objective identifies a fund s investment goals based on the wording in the fund prospectus, the Morningstar Category identifies funds based on their actual investment styles as measured by their underlying portfolio holdings (portfolio and other statistics over the past three years). 1. Two large hedge fund databases, Hedge Fund Research and Credit Suisse, contain over 7, and 9, funds respectively (as of June, 1), per the databases public websites. hedgeindex.com/hedgeindex/en/faq.aspx?indexname=hedg&cy=usd Glossary Terms: Please refer to the glossary on page for additional information on any term in italics. 17. Source: Morningstar, Inc. as of June, Diversification does not protect an investor from market risk and does not ensure a profit.

5 Figure 1a: The Vast LAI and Nontraditional Mutual Fund Universe as Defined by Morningstar 19 Morningstar, Inc. classifies 8 funds across 1 categories as liquid alternative strategies. Including funds in the Nontraditional Bond category, which contains many funds that qualify as alternative strategies, the number of funds grows to 1 funds. Trading-Leveraged Commodities - 1 Volatility - Trading-Inverse Commodities - Trading-Miscellaneous - Trading-Inverse Equity - Trading-Leveraged Debt - Trading-Inverse Debt - 7 Multicurrency - 1 Long-Short Credit - 1 Bear Market - 7 Option Writing - Trading-Leveraged Equity - 7 Market Neutral Funds 1 Multialternative Managed Futures 1 Long/Short Equity 1 Nontraditional Bond Figure 1b: The Narrower Hedge Fund-like LAI Universe as Defined by GSAM Examination of the underlying fund characteristics reduces the number of liquid alternative funds to across categories. Funds 8 Tactical Trading/Macro Multistrategy 1 Equity Long/ Short Relative Value Event Driven While we believe viewing LAI through a hedge fund lens can be helpful, it is important for advisors and investors to recognize the differences between hedge funds and LAI. In particular, the regulation governing each type of vehicle differs. Alternative mutual funds are regulated according to the Investment Company Act of 19, and therefore have explicit restrictions on the amount of leverage, illiquidity, and concentration that they can employ. Hedge funds are less regulated vehicles generally without externally imposed investment restrictions. Of course, neither alternative mutual funds nor hedge funds are riskless investments, so investors can lose money in both types of funds. That said, we hope the analyses that follow will be helpful in evaluating and understanding liquid alternatives. 1 GSAM S LAI PEER GROUP SELECTION UNIVERSE In order to help investors and advisors make sense of the myriad of LAI offerings, we analyzed the 1 mutual funds that Morningstar, Inc. categorizes as liquid alternatives to identify those that employed an investment style that we deemed to be hedge fund-like. In other words, we eliminated funds that used certain nontraditional investment styles that do not closely resemble a traditional hedge fund investment strategy. Our elimination process narrowed the universe of liquid alternative investments to funds. See Figures 1a and 1b on page. Once we identified our universe of hedge fund-like LAI funds, we then assigned each fund to one of the five standard hedge fund buckets based on fund information: equity long/short, event driven, relative value, tactical trading/macro, and multistrategy. Next, we compared the performance of these new categories, or GSAM s LAI Peer Groups, to the commonly used hedge fund indices for each strategy, as well as the relevant Morningstar category averages over the past one, three, and five years (ended June, 1). We hypothesized that if investors selected from a more hedge fund-like universe, then the returns, risk, and diversification benefits (as measured by correlations and betas to traditional stock and bond indices) of LAI might more closely align with those of hedge funds. Glossary Terms: Please refer to the glossary on page for additional information on any category names. 19. Source: Morningstar, Inc. as of June, 1. For illustrative purposes only.. Source: GSAM, Morningstar, Inc., as of June, 1. Glossary Terms: Please refer to the glossary on page for additional information on any term in italics. 1. Reasons behind the performance discrepancy between hedge funds and LAI mutual funds with similar strategies include but are not limited to leverage, illiquidity, concentration, economics and others.. Source: Morningstar, Inc., as of June, 1.. Sources of information include but are not limited to: fund prospectus, fact sheet, annual/ semi-annual report, and manager commentary.. Diversification does not protect an investor from market risk and does not ensure a profit. 7

6 LAI Dispersion Because alternative mutual funds have the freedom to employ a broad set of portfolio management tools and invest without benchmarks, the return dispersion within any particular LAI peer group can be much wider than one would expect in traditional equity or fixed income categories. For more information on the performance dispersion of the LAI Peer Groups, please refer to pages -, Indeed, we found that certain LAI Peer Groups (Equity Long/Short, Tactical Trading/Macro, and Multistrategy) performed similarly to the relevant hedge fund indices over those time periods. Moreover, all five LAI Peer Groups exhibited correlations and betas to traditional stock and bond indices in line with those of the hedge fund indices. See pages -, 1-17 for the results of our in-depth analysis of each peer group. Based on these findings, we conclude that LAI have generally provided differentiated returns from traditional investments such as stocks and bonds, and that certain LAI strategies have exhibited risk and return characteristics similar to hedge funds. GSAM S LAI PEER GROUP SELECTION METHODOLOGY In order to draw the line between liquid alternatives and other nontraditional investments, we started with GSAM s definition of what it means to be a liquid alternative investment, as detailed inside the cover page. We then identified conditions that we believe are necessary for nontraditional mutual funds to behave in a manner similar to hedge funds. Our first criterion was that liquid alternatives should provide more than just long-only exposure to asset classes, namely: equities, fixed income, commodities, or currencies. Secondly, they seek to significantly hedge against potential downside risk via short positions (we used % of net assets as a threshold, the same threshold that Morningstar, Inc. uses). We believe that, without considering this narrower universe, investors could end up investing in a fund with an investment strategy that is inconsistent with their investment goals or objectives. For GSAM s LAI Equity Long/Short Peer Group, we included all funds that select stocks long, using a bottom-up, top-down, fundamental or quantitative process, and then hedge by shorting stocks, stock-index futures, ETFs, or long put options (again using the % minimum threshold). Most of these funds were sourced from Morningstar s Long/Short Equity category, and a few were found in the Morningstar Market Neutral category. For GSAM s LAI Relative Value Peer Group, we included all funds that seek to capture the price differential between two similar securities. Therefore, we selected the equity market neutral and (non-merger) arbitrage funds from the Morningstar Market Neutral category. For GSAM s LAI Tactical Trading/Macro Peer Group, we chose all funds that take dynamic directional (long or short) views on at least three of four asset classes (equities, fixed income, commodities, currencies) using systematic or discretionary approaches. We combined the systematic managed futures funds from the Morningstar Managed Futures category with the global macro strategies (which consistently short %) from the Morningstar Multialternative category. And finally, for GSAM s LAI Multistrategy Peer Group, we selected all funds which employ strategies consistent with at least two of the other LAI peer groups using a multi-manager or single-manager approach, using active management or hedge fund replication. We found most of these funds in Morningstar s Multialternative category. Figure a summarizes these mappings and Figure b demonstrates why many funds currently residing in Morningstar s alternative categories did not meet our narrower definition of a liquid alternative. See pages For GSAM s LAI Event Driven Peer Group, we included all funds that invest in equity or debt securities in order to potentially profit from corporate events, such as mergers or bankruptcies. These strategies included the merger arbitrage funds from the Morningstar Market Neutral category, and the long/short credit strategies from the Morningstar Nontraditional Bond and Morningstar Long/Short Credit categories. Glossary Terms: Please refer to the glossary on page for additional information on any term in italics.. Past correlations are not indicative of future correlations, which may vary. Glossary Terms: Please refer to the glossary on page for additional information on any term in italics. 8 9

7 Figure a: GSAM s LAI Peer Group Definitions and Mappings Upon closer examination of the underlying fundamentals, we mapped the liquid alternative mutual fund universe to the following five peer groups. Figure b: Excluded Nontraditional Investment Styles We believe these investment styles, while nontraditional, do not materially reshape the risks of the underlying asset classes or provide meaningfully differentiated returns. Thus, we believe, they are unlikely to significantly reduce long-term portfolio risks or mitigate drawdowns. LAI Category Equity Long/ Short Goal of Category Seeks to generate returns through long and short equity views Morningstar Categories Most Commonly Sourced From Investment Styles Risks/Unfavorable Environments Long/Short Equity Bottom-Up Fundamental Top-Down Quantitative Because these strategies generally take on some broad stock market risk, they will likely lose money in a bear equity market, though potentially not as much as a long-only equity investment. They will also not likely rise as much as a long-only equity investment in a bull equity market. Investment Style Option Income Description Buys and/or sells options as an overlay to long equity positions Why Not Alternative? Do not take long and short views on equities and are highly correlated to broad markets Morningstar Category Long/Short Equity Suggested Benchmarks CBOE Buy Write/ Put Write Indices (Chicago Board Options Exchange) Risks/Unfavorable Environments These strategies, like equity long/short strategies, tend to rise less than stocks in a bull equity market and tend to fall less than stocks in a bear equity market. However, more so than in equity long/ short strategies, their performance can be hampered in periods of low volatility. Event Driven Relative Value Tactical Trading/Macro Multistrategy Seeks to profit from corporate events, such as mergers and bankruptcies Seeks to capture the price differential between two similar securities Seeks to profit from long and short directional positions in equities, bonds, commodities, and currencies Follows at least two of the strategies listed above, in an attempt to offer diversified alternatives exposure Market Neutral Long/Short Credit Market Neutral Managed Futures Multialternative Multialternative Merger Arbitrage Long/Short Credit Convertible Arbitrage Equity Market Neutral Volatility Arbitrage Trend Following Countertrend Discretionary Global Macro/GTAA Absolute Return Currency Multi-Manager Multistrategy Single-Manager Multistrategy Hedge Fund Style Premia/Replication Because these strategies generally take on some broad equity and credit market risks, they will likely lose money in a bear equity market, when there is low liquidity, and/or when credit spreads widen. These strategies also may not perform as well when there are fewer corporate events. Although these positions are typically hedged it is possible that both the long and the short positions can lose money at the same time. This tends to happen during periods of low liquidity or low dispersion among different securities in the same market. Systematic strategies tend to perform poorly or lose money when long-term asset class (up or down) price trends are not present, or if there are short-term reversals in a long-term price trend. Discretionary strategies can perform poorly if a manager makes an incorrect selection of a group of securities or an asset class. Multistrategy funds can employ different combinations of the above strategies, and therefore can act very differently from one another. They can target different levels of volatility and leverage, which may magnify both positive and negative returns. Multi-manager strategies can have higher fees, which may dampen returns. Tactical Shorting Rate Hedged Limited Shorting Leveraged Long or Short Indices Long-only equity or multi-asset strategies which attempt to time down markets Seeks to profit from long credit exposure, while hedging some duration risk Equity or credit strategies which hedge less than % consistently Track and seek to deliver the return (or inverse return) of a specific long-only index Inconsistently hedged to the underlying asset classes Insufficiently hedged to credit risk Insufficiently hedged to equity or credit risk Unhedged, levered vehicles Long/Short Equity Multialternative Nontraditional Bond Long/Short Equity Nontraditional bond Trading- Leveraged/Inverse Equity Leveraged/Inverse Debt Leveraged/Inverse Commodities Miscellaneous Long-only equity indices (S&P, MSCI World, etc.) or a balanced portfolio index (/, etc) Barclays US/Global Agg Bond, US/ global high yield bond indices Long-only equity or credit indices The fund s reported comparative index Because these strategies do not have a standard level of shorting or hedging, they may lose as much or more than a long-only investment in any environment. These strategies often short Treasuries or employ derivatives seeking to profit from rising interest rates. These positions can lose money if interest rates do not rise. These strategies are usually unhedged against credit risk, meaning they tend to lose money when credit spreads widen, similar to long-only bond strategies. Because these strategies do not have a significant level of shorting or hedging, they may lose as much as a long-only investment in a bear equity market. These are unhedged and/or levered strategies that rise and fall in step with their underlying index, but in a potentially magnified manner. Bear Market Glossary Terms: Please refer to the glossary on page for additional information on any term in italics. For illustrative purposes only. Source: GSAM, Morningstar, Inc., as of June, 1. Diversification does not protect an investor from market risk and does not ensure a profit. Glossary Terms: Please refer to the glossary on page for additional information on any term in italics. For illustrative purposes only. Source: GSAM, Morningstar, Inc., as of June,

8 LAI Equity Long/Short Peer Group Funds that select stocks long, using a bottom-up, top-down, fundamental or quantitative process, and then hedge with short stocks, stock index futures, ETFs, or long put options. Funds typically exhibit notional short exposure of at least % of net asset value. LAI Peer Group Long-Term Performance Analysis The following pages compare the returns, risk, and diversification benefits of the five LAI Peer Groups, relative to the most relevant hedge fund indices and Morningstar category averages, over the past one, three, and five years (ended June, 1). For disclosures relating to pages 1-17, please refer to page 1. OBSERVATIONS The LAI Peer Group exhibited a better total return and lower correlation to the S&P (when observable) than both comparable HFR indices and the Morningstar Category Average over all three time frames The LAI Peer Group exhibited higher standard deviation than both comparable HFR indices and the Morningstar Category Average over all three time frames. Annualized Total Returns (%) 1 Year Standard Deviation N/A 8. Correlation to S&P.8.9 N/A.99 Correlation to Barclays Agg N/A -. Beta to S&P.. N/A.8 Beta to Barclays Agg N/A -.98 Year LAI Equity Long/ Short Peer Group -.9%.% HFRX Equity Hedge Index -8.%.% HFRI Equity Hedge Index.% Morningstar Long/Short Equity Cat. Avg. -.1% -.7%.% Standard Deviation Correlation to S&P Correlation to Barclays Agg Beta to S&P Beta to Barclays Agg LAI Equity Long/ Short Peer Group % 1.% Can be found in the following Morningstar Categories: Long/Short Equity, Market Neutral Sample Sizes 1 Year: 8 Year: Year: Year.9%.%.% -.% Standard Deviation Correlation to S&P Correlation to Barclays Agg Beta to S&P.8... Beta to Barclays Agg % Glossary Terms: Please refer to the glossary on page for additional information on any term in italics. The returns represent past performance. Past performance does not guarantee future results, which may vary. Current performance may be lower or higher than the performance quoted. The performance results are based on historical performance of the indices used. The results are net of fees and will vary based on market conditions and your allocation. Returns for other share classes will vary due to different fees charged. As of June, 1. HFR data as of August 1, 1 update. N/A: HFRI Data for standard deviation, correlation, and beta metrics has been omitted due to insufficient data points as the index only publishes monthly data. HFRI and HFRX and related indices are trademarks and service marks of Hedge Fund Research, Inc. ( HFR ) which has no affiliation with GSAM. Information regarding HFR indices was obtained from HFR s website and other public sources and is provided for comparison purposes only. HFR does not endorse or approve any of the statements made herein. 1

9 LAI Event Driven Peer Group Funds which invest in equity or debt securities in order to potentially profit from corporate events, such as mergers and bankruptcies. These strategies include merger arbitrage and long/short credit. OBSERVATIONS The LAI Peer Group outperformed both HFR indices over the past 1-year period, but underperformed the comparable HFRI index over the past -year and -year periods. The LAI Peer Group exhibited lower correlation to the S&P than the comparable HFR indices over all three time frames. Annualized Total Returns (%) 1 Year Standard Deviation.9.7 N/A Correlation to S&P.9.7 N/A.7.7 Correlation to Barclays Agg N/A Beta to S&P.1. N/A.7.8 Beta to Barclays Agg N/A Year LAI Event Driven Peer Group -1.7% 1.% HFRX Event Driven Index -.% -.7% HFRI Event Driven Index -.7%.% Morningstar Long/Short Credit Cat. Avg. -.8%.% Morningstar Market Neutral Cat. Avg. -.%.7% Standard Deviation Correlation to S&P Correlation to Barclays Agg Beta to S&P Beta to Barclays Agg LAI Event Driven Peer Group Return %.% LAI Relative Value Peer Group Funds which seek to capture the price differential between two similar securities. These strategies include equity market neutral, convertible arbitrage, or multi-arbitrage strategies, which generally have a beta to the relevant stock market index of.1 or less. OBSERVATIONS The LAI Peer Group outperformed both HFR indices over the past 1-year period, but underperformed the comparable HFRI index over the past -year and -year periods. The LAI Peer Group exhibited lower correlation to the S&P than the comparable HFR indices and Morningstar Category Average over all three time frames. Annualized Total Returns (%) 1 Year Standard Deviation..18 N/A 1.8 Correlation to S&P.11.8 N/A.7 Correlation to Barclays Agg. -.8 N/A -. Beta to S&P..1 N/A.8 Beta to Barclays Agg.1 -. N/A -.1 Year LAI Relative Value Peer Group.1% 1.9% HFRX Relative Value Arbitrage Index -.% -.% HFRI Relative Value Index.% Morningstar Market Neutral Cat. Avg. -.% -.%.7% Standard Deviation Correlation to S&P Correlation to Barclays Agg Beta to S&P Beta to Barclays Agg LAI Relative Value Peer Group % % Can be found in the following Morningstar Categories: Long/Short Credit, Market Neutral Sample Sizes 1 Year: Year: 18 Year: 1 Year.7%.% 1.%.8%.% Standard Deviation Correlation to S&P Correlation to Barclays Agg Beta to S&P Beta to Barclays Agg % Can be found in the following Morningstar Categories: Market Neutral Sample Sizes 1 Year: 8 Year: Year: 1 Year.1%.9%.% -1.% Standard Deviation Correlation to S&P Correlation to Barclays Agg Beta to S&P....1 Beta to Barclays Agg % The returns represent past performance. Past performance does not guarantee future results, which may vary. Current performance may be lower or higher than the performance quoted. The performance results are based on historical performance of the indices used. The results are net of fees and will vary based on market conditions and your allocation. Returns for other share classes will vary due to different fees charged. As of June, 1. HFR data as of August 1, 1 update. N/A: HFRI Data for standard deviation, correlation, and beta metrics has been omitted due to insufficient data points as the index only publishes monthly data. Hedge Fund Research, Inc. The above mentioned HFR indices are being used under license from Hedge Fund Research, Inc., which does not approve of nor endorse the contents of this report. The returns represent past performance. Past performance does not guarantee future results, which may vary. Current performance may be lower or higher than the performance quoted. The performance results are based on historical performance of the indices used. The results are net of fees and will vary based on market conditions and your allocation. Returns for other share classes will vary due to different fees charged. As of June, 1. HFR data as of August 1, 1 update. N/A: HFRI Data for standard deviation, correlation, and beta metrics has been omitted due to insufficient data points as the index only publishes monthly data. HFRI and HFRX and related indices are trademarks and service marks of Hedge Fund Research, Inc. ( HFR ) which has no affiliation with GSAM. Information regarding HFR indices was obtained from HFR s website and other public sources and is provided for comparison purposes only. HFR does not endorse or approve any of the statements made herein. 1 1

10 LAI Tactical Trading/Macro Peer Group Funds which take dynamic directional (long or short) views in at least three of the four asset classes (equity, debt, commodities, and currencies) using systematic or discretionary approaches. Notional short exposure is a significant component of the net asset value (at least %). OBSERVATIONS The LAI Peer Group outperformed the comparable HFRX index over all three periods, but underperformed the comparable HFRI index over the past 1-year and -year periods. The LAI Peer Group exhibited near-zero or negative correlation to the S&P over all three time frames Annualized Total Returns (%) 1 Year LAI Tactical Trading/Macro Peer Group.% HFRX Macro/ CTA Index HFRI Macro Total Index 1.9% Morningstar Managed Futures Cat. Avg. -.9% Standard Deviation N/A 7.78 Correlation to S&P -..7 N/A -. Correlation to Barclays Agg.1.1 N/A. Beta to S&P -.1. N/A -. Beta to Barclays Agg 1..1 N/A 1.7.%.7%.% 1.%.% Year Standard Deviation Correlation to S&P Correlation to Barclays Agg.9... Beta to S&P Beta to Barclays Agg LAI Tactical Trading/Macro Peer Group % % LAI Multistrategy Peer Group Funds which employ strategies consistent with at least two of the other LAI Peer Groups through a multi-manager or single manager approach, using active management or passive replication. Shorting is a significant component of the net asset value (at least %). OBSERVATIONS The LAI Peer Group outperformed both comparable HFR indices and the Morningstar category average over the past 1-year period, while exhibiting a lower correlation to the S&P. Over longer time frames, the LAI Peer Group exhibited returns in between the two comparable HFR indices. Annualized Total Returns (%) 1 Year Standard Deviation..8 N/A.1 Correlation to S&P.9.8 N/A.9 Correlation to Barclays Agg N/A -.18 Beta to S&P.18. N/A. Beta to Barclays Agg N/A -.7 Year LAI Multistrategy Peer Group -.1% 1.% HFRX Global Hedge Fund Index -.% HFRI Fund Of Funds Composite Index -.% -.% 1.9% Morningstar Multialternative Cat. Avg. -.1%.8% Standard Deviation Correlation to S&P Correlation to Barclays Agg Beta to S&P Beta to Barclays Agg LAI Multistrategy Peer Group % % Can be found in the following Morningstar Categories: Managed Futures, Multialternative Sample Sizes 1 Year: 77 Year: Year: Year.%.9% -.% -.% Standard Deviation Correlation to S&P Correlation to Barclays Agg Beta to S&P Beta to Barclays Agg % Can be found in the following Morningstar Categories: Multialternative Sample Sizes 1 Year: 9 Year: Year: Year 1.% 1.%.% -.% Standard Deviation Correlation to S&P Correlation to Barclays Agg Beta to S&P Beta to Barclays Agg % The returns represent past performance. Past performance does not guarantee future results, which may vary. Current performance may be lower or higher than the performance quoted. The performance results are based on historical performance of the indices used. The results are net of fees and will vary based on market conditions and your allocation. Returns for other share classes will vary due to different fees charged. As of June, 1. HFR data as of August 1, 1 update. N/A: HFRI Data for standard deviation, correlation, and beta metrics has been omitted due to insufficient data points as the index only publishes monthly data. HFRI and HFRX and related indices are trademarks and service marks of Hedge Fund Research, Inc. ( HFR ) which has no affiliation with GSAM. Information regarding HFR indices was obtained from HFR s website and other public sources and is provided for comparison purposes only. HFR does not endorse or approve any of the statements made herein. The returns represent past performance. Past performance does not guarantee future results, which may vary. Current performance may be lower or higher than the performance quoted. The performance results are based on historical performance of the indices used. The results are net of fees and will vary based on market conditions and your allocation. Returns for other share classes will vary due to different fees charged. As of June, 1. HFR data as of August 1, 1 update. N/A: HFRI Data for standard deviation, correlation, and beta metrics has been omitted due to insufficient data points as the index only publishes monthly data. HFRI and HFRX and related indices are trademarks and service marks of Hedge Fund Research, Inc. ( HFR ) which has no affiliation with GSAM. Information regarding HFR indices was obtained from HFR s website and other public sources and is provided for comparison purposes only. HFR does not endorse or approve any of the statements made herein. 1 17

11 We believe our analysis provides new insights into the following three common questions: What types of liquid alternative strategies should I consider? Are my liquid alternative investments meeting appropriate performance expectations? How has the performance of liquid alternatives compared to private placement hedge funds? Common Questions We believe a diversified, long-term approach to alternative mutual funds can potentially benefit many investors portfolios. Returning to the three questions we often hear from advisors and their clients, here is a summary of what we believe our analysis highlights as key considerations: WHAT TYPES OF LIQUID ALTERNATIVE STRATEGIES SHOULD I CONSIDER? We believe investors evaluating the liquid alternatives landscape should initially consider our narrowed universe of funds, categorized into five LAI Peer Groups (see page for a summary of our universe). We believe this universe of funds has the potential to provide diversification benefits for traditional stock and bond portfolios because of their differentiated investment strategies when compared to traditional asset classes. In addition, each LAI Peer Group historically has shown return drivers and characteristics that we believe can potentially play distinct roles in a portfolio in various market environments (see Figure ). We believe investors can use our framework to better assess the universe of alternatives as they build a diversified, long-term investment portfolio in alternatives. Figure : Median Returns by LAI Peer Group Historically the performance of the LAI Peer Groups has been difficult to predict. We believe that this quilt pattern suggests that the effort to time an allocation to a given LAI strategy based solely on recent past performance may lead to poor future results LAI Equity Long/Short LAI Event Driven LAI Relative Value LAI Tactical Trading/Macro LAI Multistrategy These returns represent past performance. Past performance does not guarantee future results, which may vary. ARE MY LIQUID ALTERNATIVE INVESTMENTS MEETING APPROPRIATE PERFORMANCE EXPECTATIONS? Our analysis suggests that when viewed through a hedge fund categorization framework, certain liquid alternative investments, as discussed below, have delivered results similar to their hedge fund counterparts. For these strategies, hedge fund benchmarks may serve as an appropriate frame of reference when assessing historical performance and setting performance expectations. HOW HAVE LIQUID ALTERNATIVE INVESTMENTS PERFORMED RELATIVE TO PRIVATE PLACEMENT HEDGE FUNDS? Considering our narrowed universe of funds, we find that equity long/ short, tactical trading/macro, and multistrategy liquid alternative solutions historically have provided mutual fund investors with a reasonable proxy for traditional hedge fund strategies (see pages 1, 1-17). However, event driven and relative value strategies historically have translated less effectively to a daily liquid format (see pages 1-1). We therefore believe that mutual fund investors looking to achieve some of the potential portfolio benefits of event driven and relative value strategies may be better off accessing them through a multistrategy solution. There are many complexities to analyzing, categorizing, and evaluating liquid alternative investments. We hope that by re-classifying liquid alternative funds through a hedge fund lens, we can help investors better understand what to expect and how to assess the performance of their liquid alternative investments. Nadia Papagiannis is the Director of Alternative Investment Strategy for GSAM s Global Third Party Distribution. In this role, Nadia is responsible for educating clients on liquid alternatives and the role they can play in portfolios. Goldman Sachs Asset Management (GSAM) is one of the largest and most experienced alternative investment managers in the world. We have over years of experience in alternative investing and manage approximately $11 billion in alternative investment assets under supervision for institutional and individual investors worldwide. 7. Diversification does not protect an investor from market risk and does not ensure a profit. 7. As of June, 1. Assets Under Supervision (AUS) includes assets under management and other client assets for which Goldman Sachs does not have full discretion. Asset information is reported based on the product and not the portfolio management team managing that product. In June 1997, The Goldman Sachs Group, Inc. acquired the assets and business of Commodities Corporation Limited. This group is now known as Goldman Sachs Hedge Fund Strategies LLC

12 Calculation Methodology GSAM s Liquid Alternative Investments Calculation Methodology For each fund in the LAI Peer Groups, we applied the least expensive share class based on the prospectus net expense ratio. We then calculated the performance and risk (measured by standard deviation) metric for each unique fund in the peer group using data sourced from Morningstar, Inc., and took the median observation of each peer group. The median observation was used to exclude the distorting effect of outliers. For context, we also report the range of outcomes (dispersion), which includes the minimum return, th percentile return, th percentile return (or median), 7th percentile return, and maximum return for each time period. Mutual fund performance data was sourced from Morningstar, Inc. Morningstar category average performance information was sourced from Morningstar, Inc. Hedge Fund Research ( HFR ) indices were sourced from Hedge Fund Research, Inc. Market index data was sourced from Bloomberg and Morningstar, Inc. We calculated data for one-year, three-year, and five-year time segments ended June, 1 as such periodicity better captures different market cycles and is consistent with common industry reporting. One-Year Calculations. The HFRI indices only publish data on a monthly basis. To avoid showing calculations that lack statistical significance, the HFRI standard deviation, correlation, and beta statistics were omitted (because there are only 1 observations). Standard Deviation: GSAM used the smallest periodicity available for such calculations. This was dictated by Morningstar, Inc., which performs such calculations using daily data. Beta and Correlation: GSAM used the most granular periodicity available for such calculations. This was dictated by Morningstar, Inc., which performs such calculations using weekly data. Calculations of Three Years or More. Standard Deviation: GSAM used monthly data to perform these calculations, as this is industry standard. Beta and Correlation: GSAM used monthly data to perform these calculations, as this is industry standard. MATERIAL DIFFERENCES BETWEEN SUBJECTS OF COMPARISON: 8 GSAM s LAI Peer Groups: We note that there are limitations within our Peer Group methodology. These Peer Groups were created and reviewed only by GSAM. These are not indices, in that there is no weighting scheme employed to arrive at a Peer Group statistic; the median observation is always used. There is survivorship bias, in that accurate and complete data on liquid alternative mutual funds that liquidated prior to this analysis is not obtainable. The Peer Groups were based on our own selection bias, in that we selected funds from the universe that Morningstar, Inc. already deemed alternative. There is backfill bias, in that we intentionally analyze the back history of the funds in the Peer Groups. This backfill bias is not the same as in hedge fund indices, however, because hedge funds can choose if and when to report their performance data, while mutual funds cannot. Morningstar Category Averages: 9 The Morningstar Category Averages are created and reviewed only by Morningstar, Inc. and are publically available. According to Morningstar, Inc., they are simple weighted averages of all share classes of funds in a Morningstar category (also created and reviewed by Morningstar, Inc.), and published on a monthly and year-end basis. These averages have survivorship bias, as obsolete fund returns are removed from the monthly category average performance numbers. These averages do not have backfill or selection bias, as all mutual funds are required to publically report data upon inception. Morningstar, Inc., however, selects which funds belong in each category. HFRI Indices: We chose to use the HFRI indices as they are widely used indices for gauging hedge fund performance. These are created and reviewed only by Hedge Fund Research, and are available with a subscription. According to Hedge Fund Research as of June, 1, com/sites/default/files/pdf/hfri_formulaic_methodology.pdf, the HFR Hedge Fund Database is comprised of over 7 funds and fund of funds worldwide. Information on the hedge fund universe of established and emerging managers is collected directly from the fund managers and/or their respective offshore administrators, while other pertinent information is culled from offering memoranda, onsite visits, and due diligence interviews. HFR requests that the client fund managers report performance by the 1th of each month. Glossary Terms: Please refer to the glossary on page for additional information on any term in italics. 8. Source: GSAM, as of June, In an effort to distinguish funds by what they own, as well as by their prospectus objectives and styles, Morningstar developed the Morningstar Categories. While the prospectus objective identifies a fund s investment goals based on the wording in the fund prospectus, the Morningstar Category identifies funds based on their actual investment styles as measured by their underlying portfolio holdings (portfolio and other statistics over the past three years). 1